Detailed Analysis Of Golden Agri-Resources Limited

 Golden Agri-Resources Limited (“Golden Agri”) is a leading Indonesian plantation group with integrated operations for palm oil-based products. Listed on the Singapore Exchange in 1999, Golden Agri is one of the pillars of the Sinar Mas Group, one of the largest conglomerates in Indonesia.

Also, one of Golden Agri’s main subsidiaries – PT Sinar Mas Agro Resources and Technology Tbk (SMART Tbk) is also a listed company, on the Indonesian Stock Exchange in 1992.

Now, what do palm oil-based products cover? Well, we are glad you asked.

Once we stop and take a look, palm oil is everywhere in our lives, from:

• Edible products: Cooking oil, chocolate, cookies, instant noodles, ice cream, packaged bread, margarine, etc.
• Non-food products – Detergents, Lipstick, soap, shampoo, etc.

In recent years, palm oil is increasingly being used as feedstock for biofuel. With that said, its primary use remains for food.

Why is Palm Oil the most consumed vegetable oil?

In 2012, 52.1 million tonnes of palm oil was consumed. This translated to 28% of the world’s consumption of the 17 major oils & fats. The success of palm oil could be attributed to its versatility, with the palm oil-based products used throughout the world for many food and non-food products (see earlier).

Oil palm also has a higher yield as compared to soybeans, rapeseed and sunflower seed = more vegetable oil produced per hectare relative to those other vegetable oils.

Another important advantage would be palm oil’s comparatively attractive pricing relative to the other vegetable oils.

STOCK SYMBOL

TICKER SYMBOL: SGX: E5H
MARKET CAP: SGD4.9 Billion (7 July 2017)
MARKET PRICE / SHARE: SGD0.38 (7 July 2017)
INDUSTRY: Palm Oil

THE BUSINESS

Golden Agri’s business is commodities, if we were to oversimplify, it would be – 1) Palm Oil, and & 2) Oilseeds & Others.

• Palm Oil-based products

Some of you might ask, “Hey, what is an integrated player?”

Well, in layman’s term, an integrated player consists of two parts, Upstream (Plantation & palm oil mills) and Downstream (Processing & merchandising of palm based products).

Here is a quick primer on the basis of Upstream Oil Palm operations:

The optimal region for oil palm cultivation lies within 10° latitude north and south of the equator. Thus, it should not be too much of a surprise that Indonesia and Malaysia are the largest producers of palm oil, and accounted for about 85% of the world’s production of palm.

Oil palms trees typically start to produce fresh fruit bunches (“FFB”) or fruits, 3 years after planting and have an economic lifecycle of ~25 years. As perennial crops, oil palm trees have rather resilient qualities and are generally less affected by adverse weather conditions.

Now for the Downstream:

CPO would then be delivered to refining plants to be refined, bleached and deodorized (RBD).

Further processing would lead to use in food applications from ice cream to chocolates. Processing of RBD palm oil would also result in Oleochemicals, contributing towards biodiesel production.

Here are some key operational Palm Oil Stats for Golden Agri:

• • Planted Area (Mar 2017): 488,276 hectare
    • Nucleus: 385,952 hectare
    • Plasma (estates owned by smallholders): 102,324 hectare
  • Mature Area (FY2016 – Mar 2017): 476,269 hectare
  • Average Age (FY2016 – including plasma): 16Y
  • FFB Production (FY2016 -including plasma): 8,880,363 MT
  • FFB Yield (FY2016): 19.04 MT/ha
  • Milling Capacity (Mar 2017): 12,806,500 MT of FFB/year
  • OER (FY2016): 22.18%
  • CPO Production (FY2016 – including plasma): 2,015,869 MT
  • Refining Capacity (Mar 2017): 4,680,000 tonnes/annum
  • Biodiesel Capacity (Mar 2017): 300,000 tonnes/year

Oilseeds & Others

Golden Agri strategically located this segment in China to capitalise on China’s position as the largest consumer of vegetable oils.

This segment includes oilseed crushing (soybean meal), refining of soybean oil and palm oil, snack noodle and instant noodle production.

However, compared to Golden Agri’s palm oil based business, its oilseeds & others segment are relatively small, making up about 10% of FY2016 revenue and only 2% of EBITDA.

KEY OPPORTUNITIES

1. Scale

Whenever a company is in a business linked to a commodity, having scale and being an efficient, low-cost producer are keys. And Golden Agri definitely has the scale to boot.

Source: Golden Agri Presentation FY2016

Next to Sime Darby, Golden Agri with a planted area of 488,276 hectares (including plasma plantings) is the second largest player in the palm oil industry. Note: Golden Agri is the largest upstream player in Indonesia.

To place things in perspective, Singapore has an area of 719 km square = 71,900 hectares. In other words, Golden Agri’s planted area is the size of close to 7x Singapore!

Presently, Golden Agri has planted area in Indonesia – in Sumatra, Kalimantan & Papua. To sustain long-term growth, Golden Agri has also looked beyond Southeast Asia, and are invested in Africa through the Verdant Fund LP, a private equity fund that owns Golden Veroleum (Liberia) Inc (“GVC”). The Liberian government has granted GVL a concession for the evelopment of oil palm plantations in Liberia.

2. Sinar Mas Group of Companies

Sinar Mas Group is a brand of companies with 6 business units, with Golden Agri as one of the pillars – the pillar which Sinar Mas operates its agribusiness and food operations through.

Simar Mas’s 6 business pillars include:

• Pulp and Paper Products: Asia Pulp & Paper
• Agribusiness and Food: Golden Agri
• Developer and Real Estate: Sinar Mas Land
• Financial Services: PT Sinar Mas Multiartha Tbk (“SMMA”)
• Communications and Technology: Smartfren Telecom Tbk
• Energy and Infrastructure: PT Dian Swastatika Sentosa Tbk
• Initiative Projects: Eka Tjipta Foundation

As part of one of Indonesia’s largest conglomerates, Golden Agri could potentially benefit from the services and knowledge from the entire group. And no matter which part of the world you are in, in our opinion, this is definitely something valuable.

Note: For an appreciation of some of the entities they deal with, you may look towards the “Interested Person Transactions Disclosure” under Report of the Directors Note 6 of Golden Agri Annual Report 2016.

3. Research

On 22 May 2017, Golden Agri announced that they had a new, high yielding planting material from PT SMART Tbk that could increase CPO yields to the highest level in the industry. It was reported that two clones of high-yielding planting material were registered in Indonesia’s Catalogue of Seeds and approved for use by the Ministry of Agriculture.

These planting materials are reportedly able to potentially increase CPO yields to more than 10 tonnes of CPO/hectare annually at prime age from Golden Agri’s current capability of 7.5-8 tonnes of CPO/hectare annually under optimal conditions.

Additionally, these seedlings also have an earlier expected time to harvest of 24 months, compared to the current industry average of about 30 months.

However, it might take a couple of years before Golden Agri is able to cultivate a sufficient quantity of these planting material to plant over a larger commercial area in 2022.

KEY RISKS

1. Commodity – A Cyclical Business

No matter how you slice it, Golden Agri is linked to the Oil Palm business, and with palm oil based operations making up 88% of Golden Agri’s FY2016 Revenue, it should not be too surprising if we were to say that the company’s performance is rather sensitive to CPO prices.

Source: Indexmundi 5Y (2012-2017) CPO price USD/MT

Source: Golden Agri Google Finance Chart

See any similarities?

Additionally, the cyclicality of a business could also show up in the financials (hint: the net profit line).

Source: Golden Agri Annual Report 2016

2. Age of Palms

For a quick breakdown, over a 25Y economic lifecycle, these are the general classifications for an oil palm:

• Immature: 0 – 3Y
• Young: 4 – 7Y
• Prime: 8 – 17Y
• Tall: ≥ 18Y

And as at 31 Mar 2017, at an average age of 16Y (including plasma), Golden Agri with 47% of its plantings above the age of 18Y might require a sizable capital outlay in coming years.

Source: Golden Agri Presentation FY2016

3. Leverage

For FY2016, Golden Agri’s Net Debt position stood at: USD2.7 billion

• Cash + Short-term investments = USD355 million
• Borrowings + Bonds & Notes Payable = USD3.1 billion

With total Equity of USD4.1 billion this translated to a gearing ratio (net debt/equity) of 66%.

Additionally, Golden Agri’s FY2016 Interest Expense added up to USD129 million (Golden Agri Annual Report 2016 Note 8), close to 30% of its profit for the year.

On the other hand, as long as the company has the ability to access capital required, then, that’s that.

VALUATION

Based on Golden Agri’s FY2016 Shareholders Profit of USD 400M (SGD 550M), at today’s (5 July 2017) market capitalisation of SGD 4.9B, Golden Agri traded at a P/E (FY2016) of 9x. From Google Finance, Golden Agri traded at a P/E (TTM) of 10x.

Note: In 2015, Golden Agri acquired 102,792,000 of its shares in the open market for a total consideration of US$31,726,000. If we were to assume an exchange rate of USD1 for SGD1.4, this would be about SGD0.43 per share.

INVESTOR RELATION

Golden Agri-Resources Ltd
c/o 108 Pasir Panjang Road, #06-00 Golden Agri Plaza, Singapore 118535
Richard Fung

Email: richard@goldenagri.com.sg

MAJOR SHAREHOLDERS (9 MARCH 2017)

• Flambo International Limited (Widjaja Family) – Deemed Interest: 50.35%

FINANCIALS

• Income Statement – Click here
• Balance Sheet – Click here

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